Fox News: The Importance of Being Ailes

The following post is from Ronald Grover, BusinessWeek’s Los Angeles bureau chief: Anyone who ever wondered how important the Fox News Channel is to Rupert Murdoch and News Corp (NWS) need only peruse the company’s recent proxy statement. Roger Ailes, the former media consultant for Ronald Reagan who runs Fox News and other News Corp TV properties, collected almost $24 million last year in salary, bonuses, stock grants and other benefits – nearly $2 million more than Murdoch himself.

What makes the 69-year old Ailes so crucial to News Corp is the money-generating machine he has created out of Fox News, which clobbers both CNN (TWX) and MSNBC (GE) in ratings, and has become the third most watched cable channel during prime time. Its prime time anchors Bill O’Reilly and Sean Hannity are must-watch TV for news junkies.

That’s one reason why a big chunk of Ailes’ cash bonus — $5.5 million – came from a spike in the cable channel’s cash flow, which cable TV analyst Derek Baine of SNL Kagan pegs at 65% last year. He says Fox News had cash flow of $502.6 million last year. The channel saw big hikes in the fees that cable and satellite operators pay to carry it, while ratings growth also boosted ad sales, Baine estimates. Thus, the company awarded Ailes the maximum amount it could award under his contract, the company said in its proxy statement.

Even without the Fox News bonus, Ailes was not hurting. He gets an annual salary of $5 million and an annual bonus that last year was $1 million. (Murdoch gets an $8.1 million salary but no annual bonus). But while Ailes’ salary increased thanks to Fox News’ performance, Murdoch’s bonus was tied to the company’s earnings per share. As a result, like other News Corp executives with similar provisions, the CEO’s bonus fell by more than 60% “due to the negative impact of global economic conditions on the company’s fiscal 2009 performance,” the company said. In all, Murdoch received a cash bonus of $5.4 million, compared to $17.5 million the prior year, when his total compensation was $27.6 million.

Ailes is now turning his attention to the two-year old Fox Business Network, which he also oversees. FBN is seen in 50 million homes, about half the country. Ailes stands to get as many as 250,000 shares of the company’s stock (current value around $3.5 million) if he can get the channel to break-even on its cash flow. He would get another 350,000 shares if he can get its cash flow up to $100 million, according to the proxy. The channel had a negative cash flow of $46.9 million last year, says Kagan, and isn’t likely to break even until 2011.

That may be one reason why Ailes approved the signings of morning radio talk show host Don Imus and former ABC 20/20 co-anchor John Stossel, both of whom will be regulars on Fox Business. (Stossel will also appear on Fox News.) But fear not, Ailes still made money from his stewardship of the upstart business channel. Last year, he got 333,333 shares of the company’s stock, valued at around $4.4 million, the proxy says, because the fair market value of the channel “reached two times its cost.”

Other elements of Ailes’ compensation include the money that News Corp pays for his security during the work day, although he pays for his personal security. And there could be no end in sight for large pay days for Ailes. Under the terms of a contract extension that the Fox news chief signed last November, he stands to nearly double his bonus – to $10 million – by 2013. That comes on top of a hike to $1.25 million in his annual bonus and his $5 million annual salary. Then there’s the stock he’d get if Fox Business goes into the black.

But that’s not likely to make him the highest paid News Corp executive next year, even if the company revives and Murdoch’s salary returns to its lofty former heights. Former DirecTV (DTV) CEO Chase Carey, who rejoined the company on June 3 as its president and chief operating officer, got a $10 million signing bonus and will collect $8.1 million in annual salary. As for his bonus, well, Carey will pocket at least $5 million this year and could take home as much as $25 million. That could also make Murdoch second again.

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